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Risk Management in Foreign
         Exchange




               Name- Gauri Srivastava
                    Roll Number- 11
INTRODUCTION
 Foreign Exchange-
 The exchange of one currency for another, or the
conversion of one currency into another currency. Foreign
exchange also refers to the global market where currencies
are traded virtually around-the-clock.
It works 24 hours a day except weekends.
 The daily share of Indian Currency in global exchange
market is 0.9%.
In India we have direct exchange rate system.
Research Methodology

• Objective-

• To get the knowledge about the hedging tools used in
  foreign exchange.
• To know about the various concept and technicalities
  in foreign exchange.
Exchange Rate System
   The Gold Standard
   Bretton Wood System
   Floating Rate System
   Prchasing Power Parity


Methods Of Quoting Rate-

   Direct method
   In direct method
Risk Involved
Cash inflows and outflows, as measured in home
 currency equivalents, associated with foreign
 operations can be adversely affected.
   • Revenues (profits) and Costs
Settlement value of foreign currency
 denominated contracts, in home currency
 equivalents, can be adversely affected.
   • For Example: Loans in foreign currencies.
The global competitive position of the firm can be
 affected by adverse changes in exchange rates.
   • Influence on required return.
HEDGING TOOLS
• FORWARD CONTRACT
   – Forward points/ forward differential
   – Farward rate = Spot rate + Premium/ - Discount


• Risk in forward differential
   – Premium
      when currency is costlier in future than spot
   – Discount
      when currency is cheaper in future than Spot
HEDGING TOOLS
• OPTION CONTRACT
  –   Call option
  –   Put option
  –    American option
  –    European option

• Strike price
• IN, OUT, AT the money
  – In the money
  – Out the money
  – At the money
CONCLUSION
• According to the Bank for International Settlements as of April
  2010, average daily turnover in global foreign exchange markets is
  estimated at $3.98 trillion
    The $3.98 trillion break-down is as follows:
    $1.490 trillion in spot transactions
    $475 billion in outright forwards
    $1.765 trillion in foreign exchange swaps
    $43 billion currency swaps
    $207 billion in options and other products

• Forex trading is very profitable and also can be very risky, but there are
  various foreign exchange risk management strategies, that can be used to
  limit risk and financial exposure.
Thank you. 

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Risk management in foreign exchange

  • 1. Risk Management in Foreign Exchange Name- Gauri Srivastava Roll Number- 11
  • 2. INTRODUCTION  Foreign Exchange-  The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. It works 24 hours a day except weekends.  The daily share of Indian Currency in global exchange market is 0.9%. In India we have direct exchange rate system.
  • 3. Research Methodology • Objective- • To get the knowledge about the hedging tools used in foreign exchange. • To know about the various concept and technicalities in foreign exchange.
  • 4. Exchange Rate System  The Gold Standard  Bretton Wood System  Floating Rate System  Prchasing Power Parity Methods Of Quoting Rate-  Direct method  In direct method
  • 5. Risk Involved Cash inflows and outflows, as measured in home currency equivalents, associated with foreign operations can be adversely affected. • Revenues (profits) and Costs Settlement value of foreign currency denominated contracts, in home currency equivalents, can be adversely affected. • For Example: Loans in foreign currencies. The global competitive position of the firm can be affected by adverse changes in exchange rates. • Influence on required return.
  • 6. HEDGING TOOLS • FORWARD CONTRACT – Forward points/ forward differential – Farward rate = Spot rate + Premium/ - Discount • Risk in forward differential – Premium when currency is costlier in future than spot – Discount when currency is cheaper in future than Spot
  • 7. HEDGING TOOLS • OPTION CONTRACT – Call option – Put option – American option – European option • Strike price • IN, OUT, AT the money – In the money – Out the money – At the money
  • 8. CONCLUSION • According to the Bank for International Settlements as of April 2010, average daily turnover in global foreign exchange markets is estimated at $3.98 trillion  The $3.98 trillion break-down is as follows:  $1.490 trillion in spot transactions  $475 billion in outright forwards  $1.765 trillion in foreign exchange swaps  $43 billion currency swaps  $207 billion in options and other products • Forex trading is very profitable and also can be very risky, but there are various foreign exchange risk management strategies, that can be used to limit risk and financial exposure.